Coinbase CEO: IRS subpoena is unreasonable, seeks to use 1099 form tax payment mechanism

Editor's note: The author Brian Armstrong is the CEO of Coinbase, and he expressed his views on the IRS's 'John Doe' subpoena to the company. Armstrong believes that Coinbase and the IRS have a common goal: to make all US virtual currency users pay taxes. However, the 'John Doe' subpoena issued by the IRS is not reasonable and will infringe on the privacy of users, so Armstrong recommends using 1099表格used by traditional economic service providers to achieve virtual currency tax purposes without infringing on user privacy. In addition, Armstrong also suggested that the IRS treat Bitcoin as a currency, which will enable more efficient virtual currency taxation.

A few weeks ago, the IRS issued a subpoena to Coinbase, demanding that we disclose three years of bitcoin transaction records for all of our US users (covering millions of accounts). Since then, we have consulted with the IRS, outside counsel, and various industry organizations, and I wanted to share some thoughts to better inform your understanding of our thinking on this matter.

First of all, it is important to understand Coinbase's views on regulation and compliance in the field of digital currency. As an exchange, we believe that compliance with regulatory rules is the key to the success of digital currency. To establish a simple way for people to allow them to freely trade local currencies and digital currencies, we need to work closely with governments. Since the founding of the company, we have invested a lot of resources in compliance. Today, 20% of the company's 130 employees are related to compliance work.

Tax policy is no exception, and we have been committed to complying with all IRS guidance for our industry (IRS released virtual currency tax guidance in March 2014). Specifically, we began filing 1099表格for merchants that accept digital currency through Coinbase in response to the high number of subpoenas. We will even proactively create a cost basis report for our customers to assist them in reporting their taxes.

(The picture shows the cost basis report)

Earlier this year, the Inspector General for Tax Administration (the head of the IRS) wrote a report stating that “virtual currencies may offer potential benefits over traditional currencies, including lower transaction fees and faster money transfers,” but that “there is little evidence of potential tax evasion by taxpayers who engage in virtual currency transactions.”

I believe that, at its core, Coinbase and the IRS want to achieve the same thing: to have all U.S. virtual currency users pay taxes . I also believe that our previous actions have demonstrated our commitment to that goal. I do not believe that the IRS's 'John Doe' subpoena to us is the best way to achieve that shared goal.

In the past, Coinbase has complied with several IRS subpoenas (which were specific to individuals) and met their standards. However, their most recent 'John Doe' subpoena requires us to turn over all customer transaction records (including private information such as transaction history, IP addresses, customer support records, etc.). Suffice it to say that the IRS subpoena is over-regulatory and would falsely imply that all virtual currency users are cheating on their taxes. Requesting detailed transaction information for so many people simply because they use digital currency violates user privacy and is not the best way to achieve a common goal.

If the IRS asked Citibank, Fidelity, or Paypal to hand over all their customer records, they would refuse. I think we have the same obligation to do the same.

It is unfair for one of the few companies committed to compliance to issue this over-regulatory subpoena from the IRS. We will spend $100,000-$1 million to protect the privacy of our customers because of this over-regulatory subpoena. These funds could have been used to build better products or hire more employees. This heavy regulation from the IRS punishes a good citizen in the industry. Other digital currency exchanges operating abroad (which also serve US customers) are less likely to cooperate with the IRS like Coinbase did, but we are the only digital currency company (that I know of) to receive this subpoena. Given our past friendly dealings with the IRS, I believe we can resolve this issue with a phone call instead of a subpoena. I hope that in the future, we can get to that level of relationship.

The way forward

As I mentioned above, I believe Coinbase and the IRS share a common goal of ensuring that all US customers pay their taxes. I believe a good option is to use the same third-party reporting mechanism that brokerages like Fidelity use today: Form 1099-B. Ideally, we would like this structure to apply to all companies in the industry, even if it requires us to adopt it first. We are ready to implement Form 1099-b.

With this potential solution, Coinbase (and other virtual currency exchanges) will issue a 1099-B form to all US users at the end of the year, with a copy to the IRS . This will allow virtual currency users to pay their taxes more easily without infringing on user privacy. The 1099 form provides a simple summary of gains or losses from trading activity, rather than a complete transaction record, and will not contain information such as customer support information, IP addresses, etc.

Since the IRS is already very familiar with 1099 forms, I suspect this data will be easier for the IRS to ingest (compared to the unstructured data requested in the subpoena). We would love to do the work of standardizing the data structure to make it easier to work with.

Finally, I think the IRS guidance regarding virtual currency as property (rather than currency) could make this 1099 reporting inefficient (not just for Coinbase, but for the IRS and citizens as well). Gains from property do not have de minimis exemption rules for tax purposes the way currency does. This means that even the sale of a small amount of digital currency (like buying a cup of coffee) requires a 1099 form, and de minimis exemptions could simplify paperwork. Additionally, virtual currency could be treated as a real currency for tax purposes (which already has de minimis exemption rules). This would be a nice improvement to the reporting process.

in conclusion

I think there is a way for the IRS and Coinbase to do this that is a reasonable path forward to accomplish our shared goals. I firmly believe that the vast majority of people using digital currencies today are not seeking to evade taxes. They are simply investors seeking returns and people interested in this emerging technology. If we make it easy for them to pay taxes through clear reporting, I think they will be happy to do so.

Unfortunately, due to this overly regulatory subpoena, it looks like we will have to go to court at great expense to protect our customers' privacy. I hope the IRS will be willing to work with us to establish a reasonable reporting mechanism, similar to the 1099 reporting used by all economic service providers. A protracted legal battle seeking to reveal the private information of those who have not cheated on their taxes would be bad for Coinbase, the IRS, and many American citizens.